As a trustee, you will have important decisions to make regarding the assets of the trust account, so it is important to know what rules you must follow. According to Virginia’s Uniform Trust Code trustees investing trust assets must follow the prudent investor rule. The prudent investor rule requires trustees to use reasonable care, skill, and caution, consider the portfolio as a whole, and set an overall investment strategy with risk and return objectives after considering: (1) economic conditions, (2) inflation, (3) tax consequences, (4) the role of each holding in the context of the whole portfolio, (5) expected total return, income, and appreciation, (6) a beneficiary’s other resources, (7) the needs for liquidity, regular income preservation, and appreciation of trust capital, and (8) costs.

Whether or not to Delegate Investment Decision Making

If investment decisions are delegated, a trustee must exercise reasonable care, skill, and caution in: (1) picking agents, (2) setting the scope of delegation, and (3) monitoring the agent’s performance. This includes adopting an investment policy statement. Following these steps keeps a trustee from incurring personal liability to the beneficiaries. If investment decisions are not delegated then the trustee will be subject to the much higher burden of being a prudent investor, as explained above.

Where to Delegate Responsibilities

There are three main entities a trustee could delegate investment decision making to: (1) a bank, (2) Registered investment advisors, and (3) ETF Strategists. A bank is likely to suggest active management and charge a fee around 1.25% per annum plus the fees and costs that come with actively managed funds. Registered investment advisors are likely to propose around the same deal as banks. ETF Specialists specialize in index investing. Index investing is a passive strategy that attempts to generate similar returns paralleled to a broad market index. There are numerous advantages of index investing as compared to active management: (1) empirical research finds index investing tends to outperform active management over a long time frame, (2) taking a hands-off approach to investing eliminates many of the biases and uncertainties that arise in a stock picking strategy, (3) less costly with a fee of around .7%, (4) more tax efficient, and (5) more transparent.

How Smith Strong Can Help

Picking the right investment strategy as a trustee can be overwhelming, let the attorneys at Smith Strong help you make an informed decision, working alongside your financial advisor if you have one. This can be done through attending Van’s no-cost estate planning workshop. Or you can also schedule a one on one meeting with one of our attorneys. More information on the workshop can be found on our website under the “Info” tab. To schedule your first meeting or attend our estate planning seminar call (804) 325-1245 or (757) 941-4298.